The BSP Working Paper Series constitutes studies that are preliminary and subject to further revisions. They are being circulated only for the purpose of soliciting comments and suggestions for further refinements. The views and opinions expressed are those of the author(s) and do not necessarily reflect those of the Bangko Sentral ng Pilipinas.
The study examines the effectiveness of domestic prudential policies in restraining growth of real bank loan commitments and in preserving the quality of bank loans in the Philippines using panel bank data regression from the first quarter of 2014 to the fourth quarter of 2017. The study introduces three novel sets of database. First, the database includes measures of tightening and loosening of domestic prudential policies in the Philippines, by instrument, such as, credit-related instruments, liquidity-related instruments, capital-related, interconnectedness instruments, changes in banksí reserve requirements against domestic deposits and deposit substitutes, and currency-related instruments. These instruments are in turn classified into those that are adopted to preserve the banking systemís resilience and to address cyclical movements. Another database documents changes in monetary policy actions using data on the Bangko Sentral ng Pilipinasí (BSP) overnight policy rate and its monetary operations rates under the Interest Rate Corridor system. The third database compiles and records the volume of loans granted by banks for new purchases of residential properties as well as the average acquisition cost of the property from the Real Property Price Index Report.
Following diagnostic and robustness checks, the study reveals important findings for the BSP. First, tightening of domestic prudential policies, particularly those tightening measures meant to preserve resilience of the banking system are effective in curbing growth of real bank loan commitments to borrowers for acquiring new residential properties. Second, this study highlights the bigger negative impact of tightening prudential measures on real bank loan commitments by universal and commercial banks compared to thrift banks. Third, the share of bank deposits to total liabilities, liquidity position and capital adequacy gap are important drivers of growth in real bank loan commitments to borrowers. Fourth, restricting both instruments meant to promote resilience of banking system and to address cyclical movements limits weakening of bank loan quality, with the latter type of instruments having bigger negative impact. Fifth, tightening of domestic prudential policies varies with monetary policy conditions and over the business and financial cycles in the Philippines.
This study examines the moral hazard and capital buffer theories as motivations of
Philippine banks in managing their capital and risks following the adoption of Pillar 1 of the
Basel III framework on minimum capital requirement. Using the empirical model of Heid et. al
(2004) and Malovaná (2017), the results of the study indicate that most banks adjust their
regulatory capital ratio by optimizing their portfolio risk through changes in the level of capital.
Banks do not have the tendency to immediately adjust their risk-weighted exposures but are
more inclined to maintain a reasonable balance between changes in the size of their assets and
capital. Moreover, banks that have lower capital ratios relative to their peers have higher
tendency to adjust their capital ratio. The capital buffer theory likewise holds true, that is, banks
with low capital buffers rebuild an appropriate level of buffer by decreasing their risk exposures
while banks with high capital buffer are inclined to simply maintain their capital ratio when
these banks increase their risk exposures. Another interesting finding of the study is that the
adoption of minimum capital requirement did not result in moral hazard problem rather banks
have become more risk-sensitive. In particular, banks try to rebuild an appropriate buffer by
raising their level of capital while simultaneously lowering risk. The results are robust against
diagnostic tests, different specifications of the model and alternative estimation method.